EBRD: Russia crisis to hit ex-Soviet states harder than expected

The impact of Russia's economic crisis on its ex-Soviet neighbours will prove even more damaging than previously anticipated and continue into 2016, the European Bank for Reconstruction and Development (EBRD) said on Thursday.

Resulting from Western economic sanctions over the Ukraine conflict and falling oil prices, Russia's economic dive "is having larger-than-expected negative spill-over effects on countries with which it has strong economic links," the EBRD said.

Russia's gross domestic product is due to contract by 4.5 percent this year and 1.8 percent in 2016, according to the EBRD's latest economic forecast issued during its annual meeting held in the Georgian capital Tbilisi.

The bank's grim forecast for Russia's economy came despite hopes in Moscow that the ruble's recent rebound would lessen the economic fallout and see a return to growth next year.

"It is hard to see a rebound going forward without the reversal of the ongoing de-coupling of Russia's economy from the rest of the world and major structural reforms," the bank said.

- Remittances hit -
Under pressure from the recession in Russia and the ruble's depreciation, national currencies fell significantly against the dollar and euro in most of the ex-Soviet republics.

"The most tangible impact of the Russian recession is in remittances home which are continuing to decline at an alarming rate," the EBRD said.

It revised downwards growth forecasts for almost all countries that once made up part of the Soviet empire.

The Russian crisis will even have a strong impact on Georgia and Moldova, two ex-Soviet republics that have significantly reduced their economic dependence on Moscow and last year signed free trade agreements with the European Union, according to EBRD's forecast.

This year, Georgia's GDP will expand by only 2.3 percent as compared to a previously expected 4.2 percent, while the Moldovan economy will contract by 2.0 percent, the London-based institution predicted.

"Domestic political uncertainty is also weighing on confidence and growth (in Georgia)," it added.

Georgia's government has long faced criticism from opposition parties over its alleged mishandling of the currency crisis, failure to formulate clear economic policy and introducing unnecessary regulations.

The bank envisages weaker growth of just 1.5 percent in the oil-rich ex-Soviet nations of Azerbaijan and Kazakhstan, while the economy of landlocked Armenia will contract by 1.5 percent and that of Belarus by 2.5 percent.

In the Central Asian countries of Tajikistan, Uzbekistan and Kyrgyzstan, the return of hundreds of thousands of migrants as work dries up in Russia "is proving to be a major economic and social challenge."
In Ukraine, whose economy has been drained by the deadly separatist conflict in the country's east, "GDP is now expected to shrink by 7.5 percent this year -- a worsening outlook since January, when a five percent contraction was forecast," the EBRD said.

It added that the country would return to positive growth of 3 percent in 2016 if the massive programme of Western financial aid it is receiving remains on track.

In July 2014, the EBRD froze new investments in Russia as part of the Western economic sanctions imposed on Moscow over its alleged role in backing the pro-Russian rebels in the unfolding Ukraine crisis.

Russia on Thursday criticised the decision as contradicting EBRD's mandate.

Speaking in Tbilisi at the meeting of EBRD's board of governors, Russia's deputy finance minister Sergei Storchak said Moscow was "surprised and disappointed" that EBRD "was being used to step up political and economic pressure."

Founded in 1991, the EBRD is an international financial institution owned by 64 countries, the European Union and the European Investment Bank.

It was initially focused on building market economies in the former communist states in Central and Eastern Europe and currently supports development in 30 countries in Central Europe and Central Asia as well as in five countries in the Middle East and North Africa.